Analysis: Dell LBO talks reveal other leverage options

A company logo of Dell is seen on the cover of its laptop at a Dell outlet in Hong Kong October October 21, 2009.Bobby Yip

NEW YORK (Reuters) - A bid to take Dell Inc private by buyout firm Silver Lake and its partners underscores the financing market's willingness to lend up to $15 billion to the world's No.3 PC maker -- money that could be used to buy back shares and pay dividends even if the deal doesn't come together.

The Silver Lake-led bidding group has lined up debt financing from at least four major banks and is negotiating a final price to pay Dell shareholders, people familiar with the matter have said.

Should the buyout talks collapse, Dell could still choose to borrow itself and embark on a large share repurchase, in what investors and analysts refer to as a "Plan B".

"Whatever they are going to do, they could do in a public setting," said a senior executive at a competing private equity firm that is not currently involved in the deal.

"Shareholders could demand that Dell borrows the same money Silver Lake was going to borrow, buy back shares from whomever wants to sell them, and whoever stays involved can go about restructuring the business. That's a possible outcome here," the executive said on condition of anonymity.

This "Plan B" could also be deployed in the event that Dell shareholders reject any buyout deal reached between Silver Lake and Dell, shareholders and analysts said. This could be one viable alternative to a sale, and could increase Dell's negotiating power as it tries to agree on a final price with Silver Lake, they added.

"There are a handful of (companies) where founders tried to take the name private and ended up executing a leveraging strategy as a public company," Barclays analyst Hale Holden wrote in a January report.

In the mid-2000s, the Dolan family, which holds a controlling stake in Cablevision Systems Corp, ditched plans to take the cable operator private and levered up the company instead. The family returned two years later with yet another bid, only to be thwarted by Cablevision's other top shareholders that deemed the family's offer as too low.

More recently, most of the failed private equity deals over $10 billion resulted in major share repurchases. Companies including Fidelity National Information Services, BMC Software Inc and Seagate Technology Plc all opted to return large amounts of capital to investors after exploring a potential sale to private equity.

BEST DEAL FOR SHAREHOLDERS

To be sure, a "Plan B" may not necessarily deliver as much value for shareholders as Silver Lake's bid. It could also be viewed by critics as financial engineering that does not offer Dell the new strategy it needs.

Silver Lake, partnered with Microsoft Corp and Canada Pension Plan Investment Board in its bid, and offered $13 to $14.25 per Dell share, sources said. The deal's size would range between $22 billion and $24 billion based on the number of outstanding shares.

As a public company, Dell is unlikely to borrow as much as Silver Lake and its partners would. In the absence of a buyout, Dell would also not be getting any new equity investment from Silver Lake's consortium.

But in the case of Dell, whose PC business has been struggling to adapt to the popularity of gadgets such as tablets, a leveraged recapitalization could be viewed by critics as a mere financial engineering that does not offer the Round Rock, Texas-based company the new strategy it needs.

Under that scenario, Dell would also have to undertake reforms in a public setting. It could use the PC business for cash generation and focus on high-value services for corporate clients, investors and analysts said.

"We assume Dell's strategy in going private is to complete a major transformation away from the scrutiny of public shareholders. Therefore, a leveraged recap would not address this issue," said Shannon Cross of Cross Research.

Dell has formed a special committee of its independent directors and hired Evercore Partners Inc to assess whether the company is getting the best deal for shareholders and not one that is just in the best interest of Chief Executive Michael Dell, who would back a Silver Lake bid, people familiar with the matter have previously told Reuters.

Michael Dell, who holds roughly 16 percent of the company, will need to gain the support of other large shareholders, such as Southeastern Asset Management, the company's second largest shareholder with a 7.49 percent stake, to ensure Silver Lake's bid succeeds.

With Silver Lake having won Michael Dell's blessing, other private equity firms are unlikely to try to thwart the current bidding group, people familiar with the matter told Reuters last week.

Reporting By Nadia Damouni and Greg Roumeliotis in New York, additional reporting by Poornima Gupta in San Francisco, Editing by Soyoung Kim and Leslie Gevirtz